Insights and opinions from an internationally recognized authority on investment performance measurement

Thursday, August 4, 2011

Takers vs. givers and GIPS discretion

Jed Schneider and I are doing a GIPS(R) (Global Investment Performance Standards) verification for a client, and a question came up regarding the need to create a composite.

A U.S. Equity manager is asked by a client to purchase some Canadian stock; would this (a) cause the account to become "non-discretionary" and/or (b) must the firm create a separate composite? Before I answer, let's consider the opposite situation:

Let's say you're a North America Equity manager (e.g., you invest in U.S. and Canadian stocks) and you have a client who says "No!" to the Canadian stocks; what would the answers be here? Well, first, it's up to the firm to determine if the exclusion of these stocks would cause such an impact that the account would not be representative of the strategy; if they feel that it would, they can declare it "non-discretionary" (for GIPS purposes). And, there would be no need to create a separate composite for the "U.S. only securities. However, they could (if they wanted) create a separate composite.

Why would the earlier example be any different? If the addition of Canadian stocks would cause the account to no longer be representative, why not declare it "non-discretionary"? And again, they would be under no obligation to create a separate composite. However, they could, if they wanted.

And what if they created a separate sub-portfolio for the Canadian stocks, so that they could have the U.S. stocks included, is this permitted? Yes, as long as the cash is being managed separately. And the Canadian-only portfolio, again, need not be included in a separate composite, because this was an accommodation for the client (just as the removal of Canadian stocks would be). Make sense?

In an email confirming his agreement with our position on this, our colleague John Simpson wrote:

If a client asked a US equity manager to buy some Canadian stock, then as far as composites there would be three options:

If the strategy is not inhibited/prohibited by the request, the portfolio should remain in the composite

If the strategy is inhibited/prohibited, the portfolio should be marked as nondiscretionary and excluded from composites

Alternatively, the portfolio could be added to a separate composite.

I do think that such a request might be more likely to make a portfolio nondiscretionary than a restriction in general, but I guess it depends on the Canadian stock purchased (or the restriction).

Whether the client is taking something away from your strategy ("no technology stocks for me!") or giving ("please add some health care to the mix"), the same rules for GIPS discretion can apply.

Spaulding, David Spaulding

About David Spaulding

is an internationally recognized authority on investment performance measurement. He's the founder and Chief Executive Officer of The Spaulding Group, Inc. (www.SpauldingGrp.com), and founder and publisher of The Journal of Performance Measurement. He's the author, contributing author, and co-editor of several investment books. He's actively involved in the investment performance industry, serving on numerous committees and working groups.
Dave earned his BA in Mathematics from Temple University, his MS in Systems Management from the University of Southern California, an MBA in Finance from the University of Baltimore, and a doctorate in Finance and International Economics from Pace University.
For more information please visit www.spauldinggrp.com/the-company/david-spaulding.html

Friends, colleagues, associates: by signing up, you'll be notified of new postings

Follow by Email

Dave is available...

Dave Spaulding is available for keynotes, corporate seminars, conferences, user groups, and interviews with well established media outlets. To schedule or discuss, please contact Chris Spaulding at (732) 873-5700 or via email CSpaulding@SpauldingGrp.com.

Important Performance Links

Are you truly a Performance Measurement Professional?

Two important indicators of you truly being a Performance Measurement Professional:

#1 - That you subscribe to The Journal of Performance Measurement. This publication has been the "bible" of performance measurement for over a decade. It's where new ideas are presented, debates are held, information shared. To learn more about the journal and to receive a complimentary copy, visit www.SpauldingGrp.com or contact Patrick Fowler (PFowler@SpauldingGrp.com) or Chris Spaulding (CSpaulding@SpauldingGrp.com).Subscribe now!

#2 - That you dress like a performance measurement professional. For the latest in fashion contact Patrick Fowler (PFowler@SpauldingGrp.com) or Chris Spaulding (CSpaulding@SpauldingGrp.com)

TSG's Guide to the Performance Presentation Standards

Our latest book is now available: TSG's Guide to the Performance Presentation Standards. This is a revision of an earlier book, that has been significantly enhanced. To learn more contact Christopher Spaulding (CSpaulding@SpauldingGrp.com).

Ask how you can get a free copy!

Don't miss out ... sign up for our newsletter

The Spaulding Group's critically acclaimed, complimentary monthly newsletter, Performance Perspectives, is in its 9th year. Each issue contains more in-depth analysis and ideas than can typically be provided in a Blog post. If you're not already a recipient, please sign up today. Contact Patrick Fowler at PFowler@SpauldingGrp.com.